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Illiquid

Definition

Illiquid (illiquidity and illiquidity premium) - An investment is illiquid if it is not readily and easily convertible to cash. An "illiquidity premium" is an investor's expectation of higher returns for holding a less-liquid investment.

Using the term Illiquid :

An endowment, foundation or life insurance company all tend to have very lived liabilities and have negligible needs to ready cash (5 to 15% maximum per year). Therefore, often times, these types of investors will often invest a large degree of their portfolio in less liquid investments like private equity, hedge funds and hard assets in expectation of receiving the illiquidity premium.

Pay Special Attention To :

Illiquidity can be very dangerous in times of extreme market volatility or during a credit crunch. These types of markets cause the already illiquid marketplace to nearly evaporate. Therefore, even investors that do not normally need a large amount of liquidity may be caught in a bind. It is prudent to be mindful of the liquidity of one's investments and if large cash needs are coming up within the next 3 to 5 years, then periodic and regular adjustment of the portfolio towards a more liquid profile is prudent.

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Related terms

Liquidity , Alternative Investments , Hedge Fund

'Illiquid' appears in the definitions of these other terms:

Alternative Investments Stock